management of risk in construction

Risk Management in the Built Environment

Management of Risk in Construction

By Professor Simon Burtonshaw-Gunn – licensed under the Creative Commons Attribution – Non-Commercial – Share Alike License

http://creativecommons.org/licenses/by-nc-sa/2.5/


School of the Built Environment

MSc Construction Management


Presentation 1: Introduction to Risk Management

Professor Simon Burtonshaw-Gunn


So to start, what are risks?

Introducing Construction Risk Management


In life there are risks:



- in driving a car



- or even parking it



- in flying a light aircraft



- or in playing various sports


So too in business . . . .


So too in business . . . . although such risks are naturally associated with a financial risk compared to the market volatility and hence the ability to realistically provide expectations based upon a risk versus reward trade off.

Whilst the management of corporate financial risk is undertaken through a very specialist risk discipline this presentation looks at the subject of risk management from a project, business or operational viewpoint where such risks can be internally or externally driven and may impact on the project’s objectives.


Risks and uncertainty occur in all construction projects and traditionally centre on the three project management constraints of

• time, •quality and •cost

More recent authors also note that project managers need to meet or exceed “customer expectations and needs”.


Dennis Lock, in his book, on Project Management proposes that:

“It is not surprising that projects, which metaphorically (and sometimes literally) break new ground, attract project risk.

Project risks can be predictable or completely unforeseeable. They might be caused by the physical elements or they could be political, economic, commercial, technical or operational is origin.

Freak events have been known to disrupt projects, such as the unexpected discovery of important archaeological remains or the decision by a few members of a rare protected species to establish their family home on what should have been the site of the project.”


The Natterjack Toad - Epidalea calamita

Threatened by habitat loss and the scrubbing up of its open habitats (often caused by changes in management such as the reduction in grazing) and suffering from competition from the commoner amphibian species the Natterjack is threatened in Britain

Because it is so threatened the Natterjack is strictly protected by British and European law which makes it an offence to:• kill, injure or capture them;

• disturb them in any way • damage or destroy their habitat • possess them or sell or trade them in any way.


So, what then is the purpose of Risk Management and what are the consequences

of not doing it ?


• The objectives of risk management are to ensure the rapid identification of risks within the business and to establish a clear process of assessment, action planning and reporting of the risks identified.


• The objectives of risk management are to ensure the rapid identification of risks within the business and to establish a clear process of assessment, action planning and reporting of the risks identified.

• It is important that focus and attention is given to the identification of opportunities as this will enable effective decision making to ensure that:

• Business opportunities can be quickly assessed at an appropriate level in order to decide if and how it might proceed with such opportunities.

• Threats to the project or other parts of the company’s operations can be eliminated or reduced to an acceptable level.

• All decisions take account of contributing to sustainable shareholder value.

• Key risks and the appropriate control measures are kept under regular review and reported


Why reduce risk?


Why reduce risk?

• To ultimately reduce the likelihood of people/environment being exposed to a hazard and therefore harm

• To make the company more efficient by reducing accidents and the cost associated with them, i.e. lost time, legal actions by either individuals or the Regulator, profits, share price, etc.. . . . See also next slide

• The net benefit is that people feel safer in their work and therefore work more efficiently and productively


UNINSURED COSTS

• Product and material damage• Plant and building damage• Tool and equipment damage• Legal costs• Expenditure on emergency supplies• Clearing site• Production delays• Overtime working and temporary

labour• Investigation time• Supervisors time diverted• Clerical effort• Fines and Reputation• Loss of expertise / experience

INSURED COSTS

• Covering injury, ill health, damage.

£1The accident iceberg . . .

What amount this

??

Source: UK Health & Safety Executive


The accident iceberg . . .

UNINSURED COSTS

• Product and material damage• Plant and building damage• Tool and equipment damage• Legal costs• Expenditure on emergency supplies• Clearing site• Production delays• Overtime working and temporary

labour• Investigation time• Supervisors time diverted• Clerical effort• Fines and Reputation• Loss of expertise / experience

INSURED COSTS

• Covering injury, ill health, damage.

£1

£8 - £36



Insurance and Risk in Project Management .


Risk?

Risks that must be insured

Risks that can be insured

Risks that can't be insured

Required by law

Required by contract

Management choice

Contractor's or customer's risk

Examples

• Employer's liability for employees

• Liability to third parties for motor accidents

Examples

• Professional liability

• Indemnity to customer against injury to persons

Examples

• Loss or damage to project property

• Pecuniary loss through unforeseeable cause

Examples

• Unreasonably high risk

• Insurer unable to spread risk

• Insured would stand to profit

From Project Management by Dennis Lock, Published by Gower, 2007


Indeed The Institute of Chartered Accounts report that: “They, (project staff) collectively, should have the necessary knowledge, skills, information and authority to establish, operate and monitor the system of internal control. This will require an understanding of the company, its objectives, the industries and markets in which it operates and the risks that it faces.”

Internal Control, Guidance for Directors on the Combined Code on the

Committee on Corporate Governance, The Institute of Chartered Accountants


Looking at Risk Management from the most senior level of the organization . . . . from December 2000 all London Stock Exchange listed companies have been required to comply fully with the Turnbull Report on Corporate Governance which notes that:

“Risk management is essential for reducing the probability that corporate objectives are jeopardised by unforeseen events. All that the company is trying to achieve can be affected by risk exposure. They should be proactively managed”

Implementing Turnbull, A Boardroom BriefingThe Institute of Chartered Accountants


Risk Framework

Senior Management

Accountabilities

General and Business EthicsBehaviours

Control Framework

Policies

Typical Corporate Governance Model

Given the importance of Corporate Governance and its relationship to being able to demonstrate responsible Risk Management many of the larger organizations in the UK have embed Risk Management as part of their corporate governance approach.


The balance between the organization’s ability to take risks for business purposes and that of risk management in the form of corporate governance and a management process illustrates the difficulty of balancing risk taking with risk management, in reality this two forces cause the project to osculate around the optimum approach.

Risk Taking

Risk Management

Out of Control

- “fire fighting”

-crisis management

Over Control

- “red tape”

-loss of quality

Theory

Practice

- “ ”

-

- “ ”

-


The right amount of control

Risk

Optimum balance for risk

control

UnstructuredIll-definedSuperficial

ComplexUnworkableTheoretical

Cost of risk occurring



Risk


control




Cost of controlling

risks



Risk

Total cost


control




Cost of controlling

risks


• By proactively addressing risks correctly the project should

• cost less,

• be completed more quickly, and

• produce products more likely to meet the client’s requirements.

• As such the test of an organization’s commitment to achieving effective Risk Management is the visible willingness to allocate budget or other resources to risk actions at each stage of the project – (see also later slides).

• This implies that all the actions are on the senior management of the organization but responsibilities for Risk Management are far wider than this as both the Project Manager and Project Teams have direct project and governance responsibilities.

Risk Management in the Built EnvironmentIntegrating Risk Management with other Project Management Functions

Project Risk

Cost

Quality

Time

Requirements and Standards

Time objectives Restraints

Cost Objectives Restraints

Project Risk

Cost

Quality

Time




In focusing on typical construction projects, the topic of Risk Management can be seen to impact on its many facets of the project.


Project Risk

Project Management integration

Cost

Quality Human Resources

Scope Information / communication

Time Contract Management


Expectations and Feasibility

Ideas, directions Data Exchange

accuracy

Life cycle and environment

variables

Availability Productivity


Services, Plant materials:

Performance


Project Risk

Project Management integration

Cost

Quality Human Resources

Scope Information / communication

Time Contract Management


Expectations and Feasibility

Ideas, directions

accuracy

Life cycle and environment

variables

Availability Productivity


Services, Plant materials:

Performance


In focusing on typical construction projects, the topic of Risk Management can be seen to impact on its many facets of the project.


In construction, what are the relationships between the Prime

Contractor and other management disciplines


Human Resource Issues

Project Management

Supply Chain Management

Construction ManagementOps + Facility Management

Commercial Management

Total Quality Management

Design Management

• Detail design• Concept design• Value Engineering• Value Management

• Project Financing• Through Life Costing• Contract Management

• Organization structure• Cost and Price issues• Customer expectations

• Planning • Site Safety• On-site construction

• Competition• Relationships• Selection Process

• Organization procedures• Continuous Improvement• Performance measurement

• Attitudes• Staffing• Social / behaviour

• Operation• Maintenance• Transfer

Prime Contractor

Human Resource Issues

Project Management

Supply Chain Management

Construction ManagementOps + Facility Management

Total Quality Management

• Detail design• Concept design• Value Engineering• Value Management

• Risk Management

• Project Financing• Through Life Costing• Contract Management

• Organization structure• Cost and Price issues• Customer expectations

• Planning • Site Safety• On-site construction

• Competition• Relationships• Selection Process

• Organization procedures• Continuous Improvement• Performance measurement

• Attitudes• Staffing• Social / behaviour

• Operation• Maintenance• Transfer

Prime Contractor


The British Standard on Project Management (EN BS 6079-3:2000) defines this as:

“uncertainty inherent in plans and the possibility of something happening (ie a contingency) that can affect the prospect of achieving business or project goals.”




In the Vocabulary of the Standard a further definition is also provided as a: “combination of the probability or frequency of occurrence of a defined threat or opportunity and the magnitude of the consequences of the occurrence.”




In the Vocabulary of the Standard a further definition is also provided as a: “combination of the probability or frequency of occurrence of a defined threat or opportunity and the magnitude of the consequences of the occurrence.” “the process whereby responses to the risks are formulated, justified, planned, initiated, progressed, monitored, measured for success, reviewed, adjusted and (hopefully) closed”

(The Association of Project Management 1997).


School of the Built Environment

MSc Construction Management


Presentation 1: Introduction to Risk Management

Professor Simon Burtonshaw-Gunn

management of risk in construction

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